This case is based on an implementation example presented by Ernst Young in Financial

Machinery International (A) This case is based on an implementation example presented by Ernst & Young in Financial Reporting Developments, Foreign Currency Translation, FASB Statement No. 52. The explanation accompanying the illustration is reproduced below.Teaching Strategy The most successful teaching approach is to start by asking the student to identify the appropriate functional currency to use (the Deutsche mark, since the company does most of its business in this currency) and to explain the DM130,719 transaction loss. This gets the class thinking about Deutsche marks and their relationship to the U.S. dollar during the period of the case. It also helps the class to appreciate that the dollar denominated debts value is fixed in dollars. If you plan to get through the case in one period, do not spend too much time on these "warm-up" questions.Next, the class should work its way through Exhibits TN-1, TN-2, and TN-3, assuming the Deutsche mark is the functional currency. These exhibits, in the form they are in the case, should be put on the main board(s) prior to class. The class should fill in the missing data. The various side calculations (computing cost of goods sold, etc.) should be done on side boards. The students should be able to get the translation "plugs" correct. At this stage, do not try to get explanations of the "plugs." The purpose of this particular part of the exercise is to get the students to understand how electing the Deutsche mark or the U.S. dollar as the functional currency changes the restatement methodology used and the handling of the balance sheet restatement gains or losses.To give the class a break from calculations, the instructor might want to focus on question 4 at this point. That is, discuss the impact of the functional currency choice on key ratios and levels of profitability.The class should end with a discussion of question 5.This Teaching Note is authorized for use only by Camilla Jensen, University of Nottingham Malaysia Campus until January 2016. Copying or posting is an infringement of [email protected] or 617.783.7860.Case Notes & Answer with Free Case File for Machinery International (A) David F. Hawkins Case File Download Link at the end of this file. 1 / 2

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Exhibit TN-1A.B. Deutz GmbH Balance Sheet, December 31, 2000 Functional U.S. Dollar Functional Deutsche Mark Deutsche Marks Exchange Rate a U.S. Dollars Exchange Rate a U.S. Dollars Assets Current assets Cash DM 575,000 .510 $293,250 .510 $293,250 Certificate of deposit 1,960,784 d

.510 1,000,000 .510 1,000,000

Accounts receivable 1,685,000 .510 859,350 .510 859,350 Inventories 1,600,000 .534 c

854,400

.510 816,000

5,820,784 3,007,000 2,968,600

Property and equipment 2,250,000 .529 b

1,190,250 .510 1,147,500

Accumulated depreciation 260,000 .529 b

137,540

.510 132,600

1,990,000

1,052,710

1,014,900

DM7,810,784

$4,059,710

$3,983,500

Liabilities and stockholders’ equity Current liabilities Accounts payable DM1,745,625 .510 $890,269 .510 $ 890,269 Due to parent 2,941,176 d

.510 1,500,000

.510 1,500,000

4,686,801 2,390,269 2,390,269

Long-term debt 2,000,000 .510 1,020,000 .510 1,020,000 Deferred income taxes 45,000 .510 22,950 .510 22,950 Stockholders’ equity Capital stock 600,000 .529 b

317,400 .529

b

317,400

Paid-in capital 200,000 .529 b

105,800 .529

b

105,800

Retained earnings 278,983 e

203,291 203,291

Equity adjustment from translation

(76,210)

j

1,078,983

626,491

550,281

DM7,810,784

$4,059,710

$3,983,500

This Teaching Note is authorized for use only by Camilla Jensen, University of Nottingham Malaysia Campus until January 2016. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.

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